How Cloud Computing’s Growth Disrupts Hardware & Software Vendors

Businesses are subscribing to software, storage and computing power delivered over the Internet at a jaw-dropping pace, Over the next five years, global spending on cloud-computing services will increase at a pace five times greater than the growth of the information technology (IT) industry as a whole. To survive in this new landscape, technology makers will have to completely redefine their products, business models and cultures

Instead of selling direct to the corporations that actually use computing services, hardware, software and infrastructure vendors will all need to pivot to serve the new cloud services new market. That’s the lesson from the latest forecasts by market researcher IDC.

The difference is stark. IDC estimates companies will spend $100 billion on IT cloud services by 2016. That compares to $40 billion companies are expected to spend this year and represents a five-year, compound annual growth rate of more than 26%.

Software Disruption

Huge disruption is expected in the software market. Salesforce.com, launched in 2000, perfected the Software-as-a-Service market for businesses, and its success has led to big-name companies like Oracle, SAP and Microsoft introducing SaaS versions of their own business software. “You have to be a strong player in SaaS now, if you’re going to survive as a software vendor,” said Frank Gens, IDC analyst and co-authorof the forecast. Delivering software over the Internet will account for almost 60% of the public IT cloud in 2016.

Heading into to the cloud means redesigning products and making major business model changes for software makers. The lump-sum software sales prices and annual maintenance fees software makers get today will have to be converted into monthly subscription fees. It’s not at all clear whether those fees will match the totals of the sales and maintenance charges they replace. And they money will come in at a very different pace – distributed over time rather than with the majority up front.

In addition, customers will pay only for the software and service they actually use, rather than licensing the whole package. “That is hugely disruptive for the market,” Gens said. “Traditional vendors are all looking at a financial abyss that they’re trying to vault over.”

The only way to make the numbers work, vendors and observers agree, is for software vendors to dramatically in increase the number of customers they serve. The days when large vendors could build a robust business selling to just the Fortune 5000 are nearing an end. Instead, most software makers will have to sell to everyone, since success will be measured in volume.

“If you just stay with the Global 5000, it’s going to be very hard to be a successful large scale IT vendor anymore,” Gens said. “You have to reach out to and you have to love small businesses, even the smallest ones.”

Hardware Vendors Have Their Own Problems

Hardware vendors will also suffer stress in the transition. To a large extent, heading to the cloud represents a continuation of the trend toward virtualization that has dominated IT for the last 10 years. Before companies could run multiple operating systems on virtual machines, servers were often used at 20% to 30% of capacity. With the cloud, on-premise hardware will share computing power with an infrastructure service provider, which will result in companies doubling the amount of capacity they get with their hardware. Assuming equal demand, that’s likely to suppress the need for new servers and associated equipment.

To make up the difference in selling less hardware to enterprises, vendors will have to focus on those companies delivering cloud services, whether its SaaS companies or Infrastructure-as-a-Service (IaaS) vendors like Amazon and Rackspace. Demand from such companies will increase as more businesses of all sizes rent more server capacity in the cloud. Will it be enough to make up the difference?

“The market will absorb as much capacity as the industry can throw out there, if it’s cheap enough and easy enough to access,” Gens said.

Corporate IT Shops Get Hit, Too

The disruption won’t be confined to hardware and software vendors. Corporate IT shops will also have to deal with dramatic change. Their tasks will shift from managing silos of their own technology resources to working with cloud vendors to get the services they need, properly integrated, at the best possible price.

Traditionally, IT shops have been divided into groups with separate organizations taking care of servers, databases, storage or sets of applications. Under the cloud model, the vendors take much more responsibility for managing and maintaining the software and hardware components.

Many jobs that focused on individual areas of in-house software will become obsolete. Instead, IT staff will be managing cloud service providers to set service levels and make sure those levels are met. “If that cloud service fails, you’re in deep trouble,” Gens warned. “Suddenly, you don’t control it. It’s your vendor controlling your IT operation.”

That’s a big deal for IT departments, since CEOs will still hold them responsible for they the company’s technology strategy and execution, even if much of the actual work gets “outsourced.” On the plus side, they should be able to save money – on up-front capital costs if nothing else – and take advantage of the latest technology and trends without having to make huge investments themselves.

As the cloud brings significant risks and benefits hardware and software vendors as well as their customers, everyone will have to work together to successfully navigate the technology evolution. But among the many choices for all the parties, opting out won’t be one of them.